Responsibility Centers

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Presentation transcript:

Responsibility Centers Chapters 3 & 4, Management Control Systems, 12th Ed., Anthony and Govindarajan

Strategy (From Previous Lecture) Corporate Strategy To maximize use of resources Business Strategy To compete in selected markets

Goals and Strategy (From Chapter 1) Strategy Formulation Goals How to attain Strategy Implementation (Execution) Objectives Management Control Systems

Where Are We Going??? Develop a Strategy Develop Goals (to support the strategy) Develop Objectives (to achieve the goals) Refine Organizational Structure (in support of the objectives) Develop Evaluation Items (in support of achieving the objectives) Assign Responsibility Centers (within the organizational structure)

Responsibility Center An organizational unit with a manager responsible for its activities Usually refers to a unit within the organization Exists to accomplish an objective

Inputs & Outputs Optimum relationship between inputs and outputs Within management control system, must be measurable Unit measurements Hours of labor, quantities of materials, etc. Monetary measurements Costs, revenues

Efficiency & Effectiveness Not mutually exclusive Two criteria used to judge responsibility centers Efficiency: Ratio of outputs to inputs Higher is better! Effectiveness: Relationship of output to predetermined objectives Again, higher is better!

Types of Responsibility Centers Revenue centers Expense centers (cost centers) Profit centers Investment centers [Chapter 6]

Revenue Center Output, and only output, is measured Measurement is normally in monetary terms Typically, sales/marketing Cannot set price Have no control over costs

Expense (Cost) Center Inputs, and only inputs, are measured Measurement is normally in monetary terms Two types Engineered expense centers Optimal relationship between inputs and outputs Discretionary expense centers Optimal relationship cannot be established between inputs and outputs

Conflicts & Goal Congruence Managers of revenue and expense centers May seek excellence at high costs Many $$$ for slight improvement in output May seek output rather than quality Increase of lesser quality products Need special budgetary controls Must consider goal congruence

Profit Center Both inputs and outputs are measured Measurement is in monetary terms Inputs are related to outputs

Profit Center Two conditions must be met to create a profit center Relevant information must be available Effectiveness of managers decisions must be measurable

Business Units Full autonomy – normally not feasible Goal congruence – risk of loss increases Capital Budgeting – normally limited

Selection of Measurement Items If manager can influence an item, it could/should be used as a measurement of performance Total control is not necessary Degree of control is relevant

Remember Two Things Not all units within an organization need to be the same! Profit centers do not have to make a profit!